IMF Executive Board Concludes 2010 Article IV Consultation with Equatorial GuineaPublic Information Notice (PIN) No. 10/53
April 23, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On April 23, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Equatorial Guinea on a lapse of time basis. Under the IMF’s lapse of time procedures, the Executive Board completes Article IV consultations without convening formal discussions.
Despite tumbling oil prices in the wake of the global crisis and lower crude oil production following its peak in 2008, real economic activity expanded by around 5 percent in 2009, propped up by a surge in public investment and continued strong activity in hydrocarbon derivatives (mostly liquefied natural gas). Inflation edged higher, pushed up by lack of competition in the retail sector, rising public wages and strong domestic demand.
The external current account shifted into deficit, as rising hydrocarbon derivatives exports were insufficient to offset the decline in crude oil production, the plunge in oil prices and the sharp increase in public investment-related imports. The deficit was financed mostly by foreign direct investment and foreign debt.
The overall fiscal balance shifted into a deficit of about 8 percent of gross domestic product (GDP), mostly because of a ramping up of investment spending as oil prices recovered. The non-oil primary balanced plummeted to a deficit of over 100 percent of non-oil GDP. The stock of government savings declined moderately but remained large, propped up in part by renewed foreign borrowing. However, the share of official foreign assets held in the Bank of Central African States (BEAC) declined significantly, with savings increasingly held offshore.
The underdeveloped financial system was unscathed by the global financial turmoil, and appears generally sound. There is no evidence of capital repatriation by foreign banks, whose local subsidiaries had no exposure to complex derivatives. Furthermore, banks remain highly liquid and report no difficulties in meeting new capital requirements.
The medium-term outlook is clouded by the onset of declining hydrocarbon production. Overall growth is likely to drop over the medium term due to lower oil output. While growth in the nonhydrocarbon sector is expected to pick up as investment in basic infrastructure begins to bear fruit and new public investments support continued construction activity, future activity will increasingly need to be driven by private sector activity. Low export diversification and high public investment-related imports will likely keep the current account in deficit over the medium term. Under current public expenditure plans, the external position would weaken, with the stock of government savings dropping sharply as oil revenues wane.
Executive Board Assessment
In concluding the 2010 Article IV consultation with Equatorial Guinea, Executive Directors endorsed staff’s appraisal, as follows:
Oil has brought great wealth and growth to the Equatoguinean economy, and strong oil revenues have financed both an ambitious public investment program and the accumulation of large financial assets. Basic infrastructure is being developed, and steps have been taken toward increased transparency. However, challenges related to declining oil production and poverty are cause for concern, and the large public spending program poses significant risks to macroeconomic and external stability. Over the medium-term, oil dependence will continue, with longer-term prospects dependant on the ability to develop alternative sources of value added through economic diversification.
The public spending program must appropriately balance development needs against risks to stability. In this context, priority should be given to public investment projects aimed at improving living standards and productivity. Moving toward a sustainable fiscal position starting in 2010 would halt the expected near-depletion of the stock of government savings over the medium term. Frontloading the adjustment by bringing the non-oil primary deficit down to around 40 percent of non-oil GDP in 2010 and placing it on a downward path thereafter would both provide sufficient fiscal space for priority projects and strengthen external stability. With few near-term prospects for a sizeable increase in non-oil revenue, the bulk of the adjustment would have to come through expenditure rationalization and the right-sizing of productive investment in line with expected future economic needs.
Improvements in public financial management are critical to ensuring the effective spending of oil wealth and strengthening macroeconomic management. In this context, investment efficiency would benefit from improved budget planning and control, redoubled efforts at prioritization, and increased use of project appraisals. The authorities should also build on recent achievements in the area of transparency and governance, including through publication of contract awards and audit reports, and increased dissemination of information on government operations, including on foreign asset holdings.
The exchange rate regime has served the country well, but continued unsustainable fiscal spending could negatively impact stability in the region. For the Central African Economic and Monetary Community (CEMAC) region as a whole, external stability requires regionally higher public savings and productivity-enhancing structural reforms to bring the real effective exchange rate in line with medium-term fundamentals. The authorities should comply with their obligations under CEMAC, raising contributions to the common pool of reserves. Overexposure to oil and risky assets should be avoided, as should contractual debt obligations which are not warranted on financial grounds.
The wide-ranging goals of the National Development Plan necessitate a comprehensive approach to development and poverty alleviation, and increasing attention should be placed on actions to strengthen human capital and improve the business climate. Efforts to broaden and deepen financial intermediation, including lending to small and medium enterprises, should continue. Moreover, removal of barriers to private sector activity and reducing regulatory discretion are crucial steps which would allow lagged growth effects from infrastructure investment to play out more fully.
Data deficiencies hamper assessment of economic developments and policy formulation. The planned 2011 Census should resolve longstanding discrepancies on population figures, and should be complemented by a household expenditure survey which could inform future social policies. Capacity building through technical assistance should continue, with the aim of participating in General Data Dissemination System as improvements are made.